SEPTEMBER 2, 2021 High Tide Inc. John Chu, CFA • (416) 607-3109 • [email protected] Rating Buy Risk Average Amrit Sidhu, CPA, CA, Associate • (416) 607-3290 • [email protected] 12-month target C$15.00 Surf’s up! Catching the next wave in cannabis—initiating Symbol HITI, TSX-V/HITI, NASDAQ Sector Consumer Discretionary coverage with a Buy rating and C$15 target Closing price ($) C$9.25, US$7.29 Potential return (%) 62.2 52-week range ($) C$2.25–16.95 The Desjardins Takeaway Avg daily value traded ($m) C$0.7 We are initiating coverage of High Tide with a Buy–Average Risk rating and C$15 target. Shares O/S (m) 47.8 High Tide is a leading cannabis retailer which ranks #2 among its peers in terms of store Market cap ($m FD) C$443 count and #1 in terms of EBITDA generated. It also operates in a low-risk, underserved Net debt ($m) C$3 segment of the cannabis sector and has the most diversified sales among its retail peers, EV ($m) C$446 generating meaningful revenue from its e-commerce platform as well as from the US, Year-end Oct-31 which suggests good optionality in that country going forward. Desjardins estimates Annual 2021E 2022E 2023E Highlights Adj EBITDA (C$m) 21.5 46.3 51.8 Net sales (C$m) 177 312 365 A leading retailer. High Tide is Canada’s second largest cannabis retailer by store count and revenue. It generates the highest EBITDA (in absolute dollars and as a percentage Quarterly 1Q21 2Q21 3Q21E 4Q21E of sales), which is driven by strong gross margins and low operating expenses. It is well- Adj EBITDA (C$m) 4.6 4.7 4.8 7.3 Net sales (C$m) 38.3 40.9 44.4 53.7 positioned in a market where the competitive landscape is fragmented. Thesis/key assumptions Most diversified retail platform. While the company generates the majority of its ● A retail leader in the underserviced Canadian revenue from its brick-and-mortar stores, its e-commerce platforms generate close to cannabis market ● Offers the most diversified revenue base among its 20% of its total sales. The majority of e-commerce revenue (mainly accessories and peers, which reduces volatility risk hemp-based CBD products) is derived from outside of Canada (mostly the US), which ● EBITDA-positive and a leader in LTM EBITDA helps diversify its revenue base across products, platforms and geographies. generation ● Growth by opening new stores and through M&A Already EBITDA-positive. High Tide has been EBITDA-positive for the past five quarters Potential catalysts (since 2Q FY20, ended April) and has generated the highest LTM EBITDA among its retail ● Higher ownership limits peers and the second highest LTM EBITDA in the entire Canadian cannabis sector. ● US federal legalization ● In-house/own-branded products ● Takeout and/or strategic partner Low-risk, underserved market. We view retail as a lower-risk cannabis segment, but ● Increased industry online sales one which can still realize similar growth rates vs other segments. Retail generally requires substantially less capital, is less prone to writedowns and impairment charges, Risks ● Increased competition from new store openings and has faced less sales volatility. While other segments have experienced overcapacity ● Operational risk from rapid expansion and excess supply, the Canadian retail market (more so Ontario and BC) remains ● Integration risk from an active M&A pipeline underserved and has good runway to add more new stores. We believe large retailers ● Regulatory changes are better positioned to take advantage of this opportunity than smaller players. Source: Desjardins Capital Markets, Bloomberg, FactSet Valuation Our C$15 target is based on an 18.0x EBITDA multiple for the period from 3Q FY22– 2Q FY23, which reflects the average multiple for a high-growth traditional CPG retailer group. Recommendation We are initiating coverage with a Buy–Average Risk rating. This report was prepared by an analyst(s) employed by Desjardins Capital Markets and who is (are) not registered as a research analyst(s) under FINRA rules. Please see disclosure section on pages 32–35 for company-specific disclosures, analyst certification and legal disclaimers. 1 SEPTEMBER 2, 2021 Table of contents 3 Moving along the value chain to low-risk but high-growth retail 4 Canada, and Ontario in particular, needs more retail stores! 6 A closer look at the underserved Ontario market 7 Company profile 8 Operational footprint 9 E-commerce platforms 9 Strong management team and an experienced board of directors 9 A leading cannabis retailer in a competitive but fragmented market 12 Revenue diversification a key differentiator among retail peers and cannabis companies 14 A leader in EBITDA generation for the entire cannabis sector 15 An industry consolidator—focused on accretive acquisitions 17 Financial overview and outlook 20 Valuation 21 Catalysts and risks 23 ESG overview 25 Comparables table 26 Appendix 1: Management team and board of directors 27 Appendix 2: Financial statement projections 29 Appendix 3: A quick overview of the Canadian cannabis sector 30 Edibles to be a meaningful sales and margin catalyst for retailers 31 Overview of the retail landscape and its role in growing the cannabis industry John Chu, CFA Amrit Sidhu, CPA, CA, High Tide Inc. Associate 2 SEPTEMBER 2, 2021 Moving along the value chain to low-risk but high-growth retail While the cannabis sector remains in the relatively early stages of development, the cultivation sector has already experienced a shakeout where licensed producers (LPs) have scaled back capacity, incurred writedowns and divested assets, with a focus on cutting costs and accelerating the path to positive EBITDA. The extraction sector has already undergone a transformation whereby all of the major players have pivoted from being third-party providers of basic extraction/tolling services (due to weak demand) to manufacturing their own in-house brands and/or providing higher value-added white label/custom manufacturing services to customers. Retail is the final step in the value chain (Exhibit 1) and we believe it has fallen under the radar with investors—retail companies have similar growth outlooks as other cannabis sub-sectors but also feature lower capital requirements and lower overall risk. Exhibit 1: Moving along the value chain to the lowest risk cannabis segment Cultivation Extraction Manufacturing Packaging Testing Distribution Retail Crowded and Excess capacity but Capital-intensive Low margins Good margins High operating Underserved fragmented space concentrated Brand-building Scalability Scalability leverage segment Capital-intensive Limited required challenges challenges Limited Fragmented Commodity commodity Consumer risk Low barriers to Low barriers to competition Low capital exposure exposure entry entry Freely scalable required Regulatory limits Low barriers to Consumer risk Large addressable Lower barriers to entry market entry High knowledge Less consumer and Lower risk base commodity risk Regulatory limits Source: Desjardins Capital Markets The low-risk retail sector. The retail segment does not have to deal with a high-fixed-cost business that requires a lot of capex—unlike LPs. There is lower risk of overcapacity and having to incur substantial writedown of assets as several LPs have done (we estimate close to C$5b of impairments have been recorded by LPs since 2019). Dilution of retail stores could eventually be a problem but the magnitude of writedowns would be much smaller and a lower risk at this point (we estimate the retail sector has recorded less than C$40m in impairments since 2019). LPs have had to deal with quality-control issues that led to biomass inventory being written down and/or entire crops being destroyed or thrown out; they have also had to deal with sales return provisions and/or price adjustments on poor-selling products. We saw massive overbuild in the sector (capacity, international operations, sales and marketing budgets, etc), which resulted in several organizational restructurings to help rein in costs. As a result, there have also been pivots in strategy: (1) LPs pivoting from focusing on the value segment to premium as consumer trends evolved; and (2) extractors pivoting from being third-party tolling/extraction services to manufacturing their own in-house brands and/or providing higher value-added white label/custom manufacturing services to customers. This has led to writedowns and disruptions to sales and margins. Retail has been able to avoid these issues; we therefore expect it to continue to have a lower risk profile going forward. High-growth opportunity. Despite the lower risk profile highlighted above, the retail sector is not sacrificing any of the inherent growth associated with the cannabis sector. Looking at consensus sales growth expectations for the Canadian retailers (~53% CAGR from 2020–22 on average for High Tide and Fire & Flower), it compares very favourably with the sales growth outlook for LP consensus (~53% CAGR) and custom manufacturers/extractors (~52% CAGR). We would also argue that the sales outlook for the retailers has better visibility given how underserved the Ontario market is in terms of retail stores. Furthermore, both major cannabis retailers (High Tide and Fire & Flower) have been EBITDA-positive for several quarters, and the EBITDA growth outlook for both is expected to be very John Chu, CFA robust (average CAGR of ~90% from 2020–22). Amrit Sidhu, CPA, CA, High Tide Inc. Associate 3 SEPTEMBER 2, 2021 Exhibit 2: Retailers forecast to have sales growth profile similar to those of other segments CAGR 2020–22E (%) Based on calendar year Sales growth outlook EBITDA growth outlook Canadian retailers1 53 89 Canadian LPs2 53 NM Canadian manufacturers/extractors3 52 52 1 2 3 Fire & Flower, High Tide; Aurora, Canopy, Cronos, HEXO, IM Cannabis, Rubicon, Sundial, Tilray, TGOD, Village Farms; Auxly, MediPharm, Neptune, Valens Source: Desjardins Capital Markets, FactSet, company reports Less sales volatility. LPs were also significantly impacted by provincial wholesalers rationalizing SKUs and destocking inventory levels such that sales were down 20–30% qoq during the early spring. Manufacturers saw flat to slightly lower sales and retailers saw modest sales growth during the same period, suggesting retailers experience less sales volatility. Overall, the retail sector has not had to deal with any of the above-noted issues, which makes it a much lower-risk sector but one that can still realize robust growth. The retail sector has also shown its resilience during the pandemic. Despite store restrictions ranging from outright closures to limited in-store capacity to curbside pickup only, along with provincial wholesaler destocking and SKU rationalization initiatives, retail has been the only sector that has not experienced significant sales pressures during this period. Canada, and Ontario in particular, needs more retail stores! While Canada as a whole was off to a slow start introducing new retail cannabis stores to the market, Ontario was particularly slow as it switched from a public model (to be operated by the provincial government) to a private one. Most of Canada (the provinces employing private-run retail models) has accelerated the rollout of new stores over the past year. We have looked at the established Colorado market as a benchmark for how the Canadian retail landscape could unfold in the coming years. We also highlight how many stores Canada and each province may be able to accommodate, using both Colorado’s cannabis store and Canada’s liquor store models as benchmarks. In Exhibit 3 below, we show the current store count (row A) and what the optimal store count could be based on Colorado’s data (row D), how many more stores Canada would need to achieve this (row F) and the percentage increase from the current store count (row G). Overall, there remains a good runway of new store openings to come, which should bode well for the big cannabis retailers that have the financial wherewithal to add new stores. Exhibit 3: Potential store count for each province Canada BC AB SK MB ON QC NB NL NS PE Private or public retail model Private/public Private Private Private Private Public Public Private Public Public A Current store count 2,290 369 659 67 106 924 68 20 30 30 4 B 2020 stores 1,332 290 543 50 51 263 51 20 28 20 4 C Optimal store count based on: D Colorado data 3,728 503 436 116 136 1,449 845 77 52 97 16 E Alcohol sales 3,597 152 907 306 97 700 260 101 247 104 23 F Minimum number of stores to add 1,438 134 -223 49 30 525 777 57 22 67 12 (row D minus row A) G % change (row F/row A) 63 36 -34 74 29 57 1,143 287 74 222 288 Source: Desjardins Capital Markets, Statistics Canada, Colorado government John Chu, CFA Amrit Sidhu, CPA, CA, High Tide Inc. Associate 4 SEPTEMBER 2, 2021 Using Colorado as a benchmark implies the need for ~3,700 stores in Canada. Colorado legalized recreational cannabis in 2012, which makes it a good benchmark for identifying a variety of different metrics and trends. The state, which has a population of 5.7m people, recorded cannabis sales of US$1.7b (or ~C$2.1b) in 2020 based on ~598 recreational retail stores (Exhibit 4). This equates to Colorado having one retail store for every ~9,600 people (one for every ~10,000 in 2019) and ~US$2.9m (or ~C$3.6m) in annual sales per dispensary. Given Canada has a population of more than 6x Colorado’s, that implies that more than 3,700 stores would be required—bearing in mind that Canada’s population is more spread out than Colorado’s, which may require more stores to properly serve the population. Based on Exhibit 3 (row A vs row D), Ontario needs significantly more stores, as do most other provinces with the exception of Alberta. We looked at the number of liquor outlets each province has (Exhibit 3, row E) and found that Colorado seemed to be a better gauge to determine the number of retail stores needed. For example, Ontario has just over 1,000 liquor outlets, by our estimates; it is already reaching that same level for cannabis stores and is expected to easily surpass it very shortly, with no signs of slowing down. We should also note that Ontario’s liquor outlets are mostly a government-run model (with the exception of grocery stores), making it harder to use it as a benchmark for the private-run cannabis retail store model. In Alberta, liquor stores are also based on a private model, suggesting it could see cannabis stores easily exceed the Colorado benchmark and move closer to the number of alcohol outlets in the province. Exhibit 4: Colorado recreational cannabis sales analysis Year-end Dec-31 (US$m) 2014 2015 2016 2017 2018 2019 2020 Recreational sales 303 578 862 1,091 1,214 1,410 1,747 Total # of licensed stores 322 424 459 509 549 572 598 Sales per store 0.94 1.36 1.88 2.14 2.21 2.46 2.92 Population serviced per store1 16,614 12,853 11,982 11,002 10,364 10,052 9,648 Growth (yoy%) Sales 90 49 27 11 16 24 Total recreational stores 32 8 11 8 4 5 Sales per store 45 38 14 3 11 19 1 Population divided by total number of licensed stores Source: Desjardins Capital Markets, US Census Bureau, Colorado government, Cova Revenue per store will likely decline as more stores are opened, but can it eventually reverse? We are mindful that as more stores open, revenue per store should continue to decline owing to dilution; however, the rate of decline—if any—depends on how quickly the black market converts to the legal market, as well as the additive nature of cannabis 2.0 (eg edibles, vapes, etc) to the overall basket size of an average sales transaction. The revenue per store for most provinces declined as more stores were added (Exhibit 5). Exhibit 5: Analysis of revenue per store by province over time Store count Revenue per store (C$000) Province Jan-19 Jul-19 Jun-20 May-21 Jan-19 Jul-19 Jun-20 May-21 Alberta 65 200 486 638 216 107 96 94 BC 8 45 196 352 245 122 150 133 Québec 12 16 42 68 935 1,362 952 729 Ontario 0 23 94 776 NA 1,288 520 143 Source: Desjardins Capital Markets, Statistics Canada, various sources We find it interesting that revenue per store in Colorado has actually increased over the years (Exhibit 6), which may have been driven by the black market converting to the legal market, the introduction of edibles and medical patients switching to the recreational market as a cheaper source of products. This suggests that having a proper and extensive distribution network in place early on John Chu, CFA Amrit Sidhu, CPA, CA, High Tide Inc. Associate 5 SEPTEMBER 2, 2021 likely led to a thriving and growing sector which helped reduce the size of the black market. Depending on the rate of conversion from the black market to the legal market, as well as new users, average revenue per store in Canada could follow a similar trend as Colorado (ie increasing once the proper infrastructure is in place and conversion of black market users to the legal market accelerates). But for now, given Canada remains underserved, we expect revenue per store to continue to decline for the short to medium term as more stores are added. Exhibit 6: Colorado recreational revenue per dispensary trending higher 3.5 700 3.0 600 2.5 500 2.0 400 (# stores) (US$m) 1.5 300 1.0 200 0.5 100 0.0 0 2014 2015 2016 2017 2018 2019 2020 Revenue per dispensary (LHS) Store count (RHS) Source: Desjardins Capital Markets, Colorado government A closer look at the underserved Ontario market Given Ontario is Canada’s largest province by population and also one of the most underserved cannabis markets from a retail store perspective, we wanted to pay particular attention to this market, especially as the province has been a focal point for many publicly listed retailers in terms of new store expansion opportunities. A recent explosion of new stores. While Ontario got off to a very slow start in terms of approving new retail stores, it started to accelerate its monthly approval rate from 20 per month in April 2020 to 40 per month in September 2020 and 80 per month in December 2020, and then to the current rate of 120 per month in February 2021. As a result, we have seen operational retail stores increase from ~150 in September 2020 to 263 in December 2020 and ~924 as of late July 2021. But the store count still falls below the ~1,400 stores needed to reach Colorado’s benchmark of one store per ~10,000 people. Ontario thus appears to remain underserved; that said, at the current approval rate of 120 new stores per month, the province should reach Colorado’s level by year-end 2021. Whether Ontario allows stores beyond that number remains to be seen. Store concentration an issue in some areas—expect a wave of closures. While the store count has remained below Colorado’s benchmark of one store per 10,000 people, there is still oversaturation in some key pockets, such as downtown Toronto (Exhibit 7), where in many instances there are multiple stores within the same block or in very close proximity to each other (Ontario did not implement any zoning restrictions in terms of minimum distance between stores, in contrast to Alberta). As a result, we expect a wave of store closures in downtown Toronto and other highly concentrated parts of Ontario and more stores opening in other pockets of Toronto and Ontario that can better serve consumers and expand the market opportunity. John Chu, CFA Amrit Sidhu, CPA, CA, High Tide Inc. Associate 6 SEPTEMBER 2, 2021 Exhibit 7: Downtown Toronto oversaturated with cannabis stores (both operational and pending) Source: AGCO Company profile High Tide, which was founded in 2009, is headquartered in Calgary and has 898 employees. The company began as a manufacturer/seller of its own-brand cannabis smoking accessories through its Smoker’s Corner–branded retailer/headshop, and since legalization in Canada has evolved to also include sales of recreational cannabis products. High Tide now has 93 cannabis retail stores nationwide under several different banners (as at August 31). It is expanding, with six additional retail stores coming online in Saskatchewan in the short term, and is targeting 200 retail stores across Canada in the long term. It is the second largest cannabis retail company by store count (Spiritleaf has more than 100 stores, mainly franchised and some corporate-owned). High Tide also operates a number of e-commerce platforms (Smoke Cartel, Grasscity, FABCBD, CBDcity, Canna Cabana, Daily High Club and DankStop) in Canada and the US. In addition, it earns subscription revenue from Cabanalytics, a consumer data insights provider. High Tide sells to the wholesale segment through its agreements with Valiant Distribution (accessories developer and distributor) and Famous Brandz (manufacturer of branded accessories). Two large Canadian LPs (Tilray and Aurora) have investments in High Tide (as of August 4, 2021, Aurora’s convertible debenture had an outstanding face value of C$10.4m and Tilray’s convertible notes receivable had an outstanding face value of C$2.0m). A large portion (~33) of High Tide’s retail stores were acquired with its Meta Growth acquisition (completed on November 19, 2020); see Exhibit 9 for retail stores by province. John Chu, CFA Amrit Sidhu, CPA, CA, High Tide Inc. Associate 7 SEPTEMBER 2, 2021 Exhibit 8: High Tide’s various brands and banners Brand/division Description Logos Canna Cabana Leading network of 93 recreational cannabis retail stores Brick-and-mortar nationwide. Meta Growth NewLeaf Grasscity Four of the largest online stores for consumption accessories. Daily High Club provides a subscription box service. Smoke Cartel Retail Daily High Club Online DankStop FABCBD FABCBD and CBDcity are leading online retailers of hemp- derived CBD products in the US. Note that FABCBD has its CBDcity own brands but CBDcity is a reseller of other brands of CBD products. Valiant Distribution Global designer, manufacturer and distributor of proprietary Wholesale designed and celebrity-licensed consumption accessories and lifestyle products. Famous Brandz Source: Desjardins Capital Markets, company reports Operational footprint High Tide’s 93 stores (86 corporate-owned, three branded (notably, all legacy lottery system winners), three joint ventures and one franchised) operate under the Canna Cabana, Meta Cannabis and NewLeaf brands (note that Meta and NewLeaf stores are expected to be rebranded as Canna Cabana stores by year-end). High Tide has the largest number of stores in Alberta and the second largest in Manitoba; it has the fourth largest number in Ontario and the third largest in Saskatchewan vs its examined peers in Exhibit 9. Notably, High Tide did not yet have operations in BC (the fifth largest province by absolute industry sales) as at August 31 but plans to enter the market soon (more on that later). Canna Cabana is High Tide’s main brand, with stores across Alberta, Saskatchewan and Ontario. As of 2Q21, High Tide’s loyalty program, Cabana Club, had 151,240 members (vs 96,629 in 1Q21), with more than 50% of average daily transactions conducted by club members. The loyalty program includes a 5% discount on regular-priced purchases, exclusive discounts, private events, notifications on new strains/restocks and exclusive merchandise. Stores with the NewLeaf brand are located across Alberta and utilize the same Cabana Club loyalty program. Exhibit 9: Number of retail stores across provinces by retailer as at August 9, 2021 BC AB SK MB ON QC YT NFLD Total Sundial (Spiritleaf) 6 52 2 4 39 0 0 0 103 High Tide (Canna Cabana, Meta, NewLeaf) 0 57 5 8 23 0 0 0 93 Fire & Flower (Friendly Stranger, Hotbox) 2 43 9 3 30 0 1 0 88 Canopy (Tokyo Smoke, Tweed) 0 10 6 12 41 0 0 6 75 Nova (Nova, Sweet Tree, Value Buds, YSS) 0 51 1 0 8 0 0 0 60 Source: Desjardins Capital Markets, company reports John Chu, CFA Amrit Sidhu, CPA, CA, High Tide Inc. Associate 8 SEPTEMBER 2, 2021 E-commerce platforms High Tide has a number of e-commerce platforms under various banners (see Exhibit 8 for retail/ e-commerce banners). Smoke Cartel, Daily High Club, DankStop and Grasscity are its e-commerce platforms for smoking accessories (ie pipes and bongs). Smoke Cartel has been operating for more than seven years and Grasscity has been operating for more than 20 years. High Tide’s acquisition of FABCBD marked its entry into the US hemp-based CBD e-commerce market, with CBDcity representing its second US CBD retailer banner. FABCBD has been operating since 2017 and offers its own FABCBD points reward program for loyal customers. CBDcity has been operating since May 2020. Both CBDcity and FABCBD sell a wide range of hemp-based CBD-dominant products (from oil and gummies to dog treats). Grasscity and CBDcity have more than 35,000 customer reviews, which in general bode well both for the credibility of the platform and as an aid in consumer decision-making. Canna Cabana also operates an e-commerce platform (in addition to its retail stores) for recreational cannabis and cannabis accessories sales. Strong management team and an experienced board of directors Senior management has strong experience in both the retail business and the cannabis sector. Specifically, CEO Raj Grover founded a chain of smoke accessories shops (headshops) in Alberta and leveraged that experience into High Tide. We believe Mr Grover’s experience dealing with cannabis consumers through his accessories stores gives High Tide an advantage in understanding the nuances of operating a cannabis retail store. Mr Grover was also able to leverage the smoking accessories business and his extensive relationships overseas (mostly in Asia) into the High Tide business model, such that higher-margin accessories represent a meaningful segment of its sales. The company’s COO, Aman Sood, also has extensive retail experience and recently served as director of operations at Meta Growth prior to its acquisition by High Tide in November 2020. During Mr Sood’s tenure at Meta, the company had the fourth largest network of stores in Canada and was one of the top revenue generators; its revenue per store was also among the highest in the cannabis retail sector, as were its gross margins. From an online platform perspective and an area of robust growth for High Tide, Chief Technology Officer Sean Geng managed Namaste Technologies’ cannabis e-commerce platform and founded Smoke Cartel, one of the world’s largest smoking accessories platforms. Lastly, its board of directors has a good mix of cannabis, retail, capital markets and financial services experience. See Appendix 1 for more details. A leading cannabis retailer in a competitive but fragmented market As of August 31, 2021, the company had 93 branded stores across Canada, of which 86 are corporately owned (sold three Kushbar stores on July 15). This makes High Tide the second largest retailer in Canada based on store count and in terms of revenue generated. However, Spiritleaf (recently acquired by LP Sundial) and its 103 stores (as of August 9) employ a franchise model, making its financials not directly comparable with those that employ a corporately owned model. Fire & Flower is just behind High Tide with 88 stores as of August 9. John Chu, CFA Amrit Sidhu, CPA, CA, High Tide Inc. Associate 9 SEPTEMBER 2, 2021 Exhibit 10: Cannabis retail landscape as at August 31, 2021 120 100 80 (# stores) 60 40 20 0 Sundial High Tide Fire and Flower Canopy Growth Nova Plantlife Alberta Ontario BC Manitoba Saskatchewan Newfoundland Source: Desjardins Capital Markets, company websites, company reports New store opening goals. The company is targeting 100 stores by year-end 2021 (we are forecasting 96), with a medium-term target of 200 stores (we are forecasting 164 by the end of FY23 and believe Ontario and BC would need to lift their maximum store limits in order for High Tide to reach this goal). In the near term, the majority of the new store growth is expected to be in Ontario, where High Tide has 20 corporately owned stores—we expect this number to reach 30 by the end of October 2021, in line with management’s expectations. As Ontario increases the maximum number of stores an entity can own to 75 stores (from 30 currently) starting in October 2021, we expect High Tide to add ~10 stores per quarter (at an average capex of ~C$0.35m, which also includes starting inventory) and reach the 75-store limit by early 2023 (this timeline could be accelerated through M&A); this is in line with management’s goal of reaching 75 total stores in Ontario over the next 12–18 months. High Tide expects to enter the BC market soon using a greenfield and M&A approach to reach its maximum eight-store limit, which we forecast to take place by the end of FY22; it is close to opening stores in BC but may look to acquire three or four stores given the 6–9-month ramp-up needed to open a new store (which includes the time to get approval for a licence). Saskatchewan is also an area which will see new stores added following High Tide’s acquisition of six retail locations in July 2021 (one operational store and five in various stages of construction) and could be an area of store growth beyond the five under construction given how difficult it is to obtain a retail licence. Saskatchewan remains well off the one store per 10,000 people mark—it has one store per ~17,500 people, making it one of the most underserved provinces that employs a private retail model (Québec and other provinces are more underserved but employ a government-run retail model). High Tide will likely continue adding stores in Alberta but at a much slower rate and in strategic locations where there is ideally less competition. For context as to the rate of new stores it could open, High Tide has added 14 new stores across Canada since the beginning of April, in addition to one operational store it acquired, which equates to an average of three stores per month. With the pandemic-related restrictions loosening, High Tide should accelerate its new store openings in the coming quarters. John Chu, CFA Amrit Sidhu, CPA, CA, High Tide Inc. Associate 10 SEPTEMBER 2, 2021 Exhibit 11: High Tide’s expanding retail store footprint 100 89 89 90 84 84 80 80 66 70 60 (# stores) 50 40 30 20 10 0 Jan-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Alberta Ontario BC Manitoba Saskatchewan Source: Desjardins Capital Markets, company reports Exhibit 12: Desjardins’ new store forecast for High Tide (corporately owned) 175 161 163 164 164 154 150 140 126 125 112 96 (# stores) 100 84 77 75 64 50 25 0 3Q21E 4Q21E 1Q22E 2Q22E 3Q22E 4Q22E 1Q23E 2Q23E 3Q23E 4Q23E 1Q21 2Q21 Alberta Ontario BC Manitoba Saskatchewan Source: Desjardins Capital Markets, company reports New store location strategy should help limit competition and margin pressures. Given a lack of zoning restrictions in Ontario to prevent competing stores from establishing operations nearby, High Tide has been focused on securing store locations within a plaza/strip mall or power centre where there is an anchor tenant (eg a major grocery store chain, an LCBO, Walmart, Shoppers Drug Mart, Canadian Tire, etc), which should help reduce competition and the oversaturation that we have seen in downtown Toronto and elsewhere. Usually, the leases at malls and plazas indicate that there will be no other cannabis stores allowed on the premises; we suspect that landlords are more likely to sign agreements with more established retail brands and those that are more financially secure, such as publicly listed retailers like High Tide. This should therefore limit competition and help reduce the likelihood of price wars between nearby stores that are trying to draw customers. John Chu, CFA Amrit Sidhu, CPA, CA, High Tide Inc. Associate 11 SEPTEMBER 2, 2021 Revenue diversification a key differentiator among retail peers and cannabis companies High Tide has the most diversified revenue of the publicly listed retailers as well as one of the most diversified revenue bases in the entire Canadian cannabis sector. A good portion of its revenue comes from non-cannabis but complementary-to-cannabis products, which also represent the majority of its international and online revenue. Looking ahead, we forecast international sales will represent a growing percentage of total sales (to 27% by FY23 from ~18% in FY21), which should help further diversify its revenue, lower its risk profile and provide greater access to a potentially fast-growing market. Online platforms represent the majority of High Tide’s international sales and should be key growth drivers. Following its acquisition of Grasscity (closed December 2018), Smoke Cartel (March 2021), FABCBD (May 2021), Daily High Club (July 2021) and DankStop (August 2021), we estimate High Tide’s online sales would represent ~27% of total sales by FY23 from ~18% in FY21. Management estimates these platforms have a revenue run rate of C$55m in US-derived sales going forward, and presumably the platforms should see continued strong growth above this level. These platforms have already experienced strong sales growth, which they have continued since being acquired. For example, we believe Smoke Cartel’s sales have already doubled the 2020 run rate; sales of FABCBD doubled in 2019 and again in 2020 (management does not expect it to double again in 2021, but is still expecting robust growth) and Daily High Club’s subscriber base is expected to grow 4–5% per month in the short to medium term (equates to ~50% growth on an annualized basis), which we believe may translate into a similar sales growth rate. COVID-19 has accelerated online sales by as much as 10 years. There is a common view that the pandemic changed the face of retailing, likely forever. It has accelerated the adoption and growth of e-commerce by 4–6 years according to Adobe and by as much as 10 years according to McKinsey. Millions of households have been buying groceries and other consumer goods for pickup or home delivery and a good portion are expected to continue using e-commerce long after the pandemic is over. McKinsey estimated that US e-commerce penetration increased to more than 30% during the height of the pandemic in 2020 from mid-teens prior to the pandemic. Not only did online shopping increase in regions where e-commerce was already widely accepted, but it also took place in regions where online shopping had low penetration rates. This should bode well for High Tide’s online platforms. US sales data also showed which consumer good categories were viewed as essential during the pandemic. Not surprisingly, groceries, alcohol and pharmacy stood out and saw strong year-over-year growth (Exhibit 13). We would put cannabis in this category as well, which should reinforce the sector’s ability to generate sales during challenging economic periods. John Chu, CFA Amrit Sidhu, CPA, CA, High Tide Inc. Associate 12 SEPTEMBER 2, 2021 Exhibit 13: Sales changes by category during the pandemic (estimated for 2020) Electronic shopping format Beer, wine and liquor Building materials Grocery stores Pharmacy Sports/hobbies Consumer appliances Retail sales Health and personal care Toys Office supplies Eating places Home Total clothing Beauty/Sephora Consumer electronics and appliances Other clothing Consumer electronics Jewelry Children's Women's Footwear Department store format Men's -75% -50% -25% 0% 25% Sales change (yoy%) Source: IBM High Tide is best positioned to benefit from an accelerated e-commerce movement. Given the limited e-commerce opportunities in the Canadian cannabis landscape (most provinces run their own competing online platform), most companies are generating minimal revenue from this line of business. For example, in Ontario the government runs the OCS.ca online platform; the pandemic has increased online sales such that the platform represented ~15% of total cannabis sales in Ontario from a historical average of ~10%. During the pandemic, private retailers have had the opportunity to make use of online deliveries and curbside pickup, but the OCS remains a meaningful online presence (and competitor) to private retailers in Ontario. There could be an opportunity going forward where Ontario allows consumers to purchase more regularly online directly from retailers instead of through the OCS.ca platform. Alberta is also considering allowing private-sector online cannabis sales, which, if approved, would provide retailers with another avenue for revenue at similar to slightly lower margins. We believe High Tide would be one of the best positioned of the private retailers if the private sector is allowed to have online sales permanently as it already has existing online platforms it can leverage to build an efficient platform with better economies of scale; it also has one of the highest store counts, which should allow for more efficient logistics (ie faster delivery and at a lower cost) than what most of its retail peers can offer. The US represents the majority of High Tide’s international sales and provides US optionality. Following President Biden’s victory in November 2020 and the Senate flipping from Republican-led to Democrat-led in January 2021, the cannabis sector has seen an increase in Canadian companies expanding into the US (mostly through tuck-in acquisitions). These initiatives generally involved hemp-based CBD-related products as cannabis is still federally illegal in the US. However, these moves were generally made with the idea of building a brand, gathering market intelligence and establishing a distribution network that can eventually be leveraged once cannabis becomes federally legal; this would help facilitate a smoother transition to cannabis by leveraging an existing hemp- based CBD business that is complementary to cannabis. High Tide was one of the first to implement such an initiative with its Grasscity acquisition, which sold smoking accessories mainly to customers in John Chu, CFA the US; these accessories are generally for use with cannabis products. We believe this gives High Amrit Sidhu, CPA, CA, High Tide Inc. Associate 13 SEPTEMBER 2, 2021 Tide a connection with US cannabis users (as well as internationally) given the complementary nature of the smoking accessories to cannabis products. High Tide recently established a warehouse base in Las Vegas to act as the main distribution hub for Grasscity, which also gives High Tide the foundation for a distribution network. High Tide could eventually follow the same route as Canopy and retail peer Fire & Flower, engaging in a partnership that would eventually give it a purchase option to acquire the US-based partner once cannabis is federally legal (but no revenue is being recognized in the meantime). That said, High Tide noted that it already has a meaningful presence in the US through its online platforms (generating close to 20% of revenue) as well as its Las Vegas distribution warehouse. A leader in EBITDA generation for the entire cannabis sector Not only is High Tide generating the highest EBITDA among its retail peers, but it is also generating the second highest EBITDA of the entire Canadian cannabis sector (Exhibit 14). It has been generating positive EBITDA for the past five quarters (commencing in 2Q FY20 (ended April)) and has seen quarter-over-quarter growth—it is the only Canadian cannabis company we are aware of that has been able to do this for that long. Exhibit 14: EBITDA rankings TLRY HITI VFF FAF ISH CHOO IMCC NOVA SNDL VLNS ROMJ HEXO LABS TGOD OGI -40 -30 -20 -10 0 10 20 30 40 (C$m) Most recent qtr LTM Note: Aurora, Cronos and Canopy have LTM EBITDA losses that exceed C$100m and have been excluded from this chart Source: Desjardins Capital Markets, FactSet, company reports A leader in margins and cost control. High Tide has consistently been among the leaders in gross margin among its retail peers. It also has one of the lowest operating cost environments (based on SG&A as a percentage of sales and SG&A on a per-store basis). It should thus be better able to withstand increasing competition from new stores than many of its peers. It is also a leader in revenue per store, which helps drive its industry-leading EBITDA. John Chu, CFA Amrit Sidhu, CPA, CA, High Tide Inc. Associate 14 SEPTEMBER 2, 2021 Exhibit 15a: Revenue per store by retailer Exhibit 15b: Gross margin per store by retailer 0.6 0.25 Gross margin per store (C$m) Revenue per store (C$m) 0.5 0.20 0.4 0.15 0.3 0.10 0.2 0.1 0.05 0.0 0.00 Fire & Inner High Tide Nova Choom Inner High Tide Fire & Choom Nova Flower Spirits Spirits Flower (Spiritleaf) (Spiritleaf) Note: Spiritleaf has since been acquired by Sundial Source: Desjardins Capital Markets, company reports Source: Desjardins Capital Markets, company reports Exhibit 15c: SG&A as a percentage of sales by retailer Exhibit 15d: SG&A per store by retailer 50% 0.25 SG&A (as a % of sales) SG&A per store (C$m) 40% 0.20 30% 0.15 20% 0.10 10% 0.05 0% 0.00 Inner Fire & Nova High Tide Choom Fire & Inner High Tide Nova Choom Spirits Flower Flower Spirits (Spiritleaf) (Spiritleaf) Source: Desjardins Capital Markets, company reports Source: Desjardins Capital Markets, company reports Better able to withstand the competition. As we discussed earlier, we expect to see store closures taking place in highly competitive and concentrated markets (eg downtown Toronto), which could alleviate some pressure on nearby stores. In the meantime, we also expect to see more pricing competition taking place between stores, which could temporarily erode margins. Larger players such as High Tide that have a larger infrastructure (ie more stores, economies of scale), a more established brand and deeper pockets will likely be able to withstand a highly competitive market better than smaller mom-and-pop stores. According to management, substantially all of High Tide’s stores are EBITDA-positive; new stores used to take 3–4 months to reach positive EBITDA, but with increased competition it is now taking twice as long to reach that level. An industry consolidator—focused on accretive acquisitions The company has a good track record on the M&A front. It has made large acquisitions (eg Meta Growth) as well as smaller tuck-in acquisitions in both retail and online. It has been successful in realizing synergies as well. And most importantly, its acquisitions have been accretive and complementary to its existing portfolio. It has used its common shares as a form of currency for all of its recent acquisitions, representing a significant portion of the total compensation. In most cases, there is a cash component, which has been in the range of ~25–60% of the total transaction value. The company’s balance sheet should be able to support an active M&A strategy going forward, with C$29.4m in cash on hand as of 2Q (ended April 2021). See the balance sheet section for more details. We expect High Tide to continue making tuck-in retail acquisitions going forward. On the retail store side, it recently acquired an operational store and five additional stores in various stages of John Chu, CFA construction in Saskatchewan. In BC, its strategy to enter the market is expected to be a combination Amrit Sidhu, CPA, CA, High Tide Inc. Associate 15 SEPTEMBER 2, 2021 of greenfield and acquisitions. We would also not rule out some acquisitions being made in Ontario, especially given intensifying competition as more new stores open. Ideally, High Tide will look to pay in a range equivalent to the replacement cost of any newly built stores it acquires and it will likely focus on acquiring a chain of stores rather than individual ones. On the non-cannabis front, we could see more acquisitions building out its online platform (both CBD and smoking accessories). We could also see acquisitions related to the manufacturing of accessories as it seeks to become more vertically integrated with existing accessories operations. We estimate non-cannabis-related sales would represent close to 27% of total sales in FY23, up from an estimated ~18% in FY21, which helps diversify its revenue base across products and regions as most (more than 80%) of the non-cannabis revenue is derived outside of Canada (mostly in the US). Any accessories manufacturers it acquires would help to increase margins as High Tide would be more vertically integrated; it can also leverage its online platforms to increase exposure of any acquired accessories SKUs. For Grasscity, more than 50% of its sales are now High Tide products compared with ~2% previously. Lastly, with regard to Daily High Club, prior to the acquisition, less than 3% of products sold on the platform were High Tide accessory products but following the close of the acquisition, High Tide product listings represent >50%. We also expect to see some cross-selling opportunities where FABCBD products could be sold on the Daily High Club, Grasscity, CBDcity and Smoke Cartel platforms as well as in High Tide’s brick-and-mortar stores in Canada (although it will need to partner with an LP to produce FABCBD products if it wants to sell into its own stores; discussions have already taken place with several LPs). We therefore expect High Tide to remain active on the acquisition front, and its history suggests future acquisitions would not only be accretive but also represent meaningful drivers of growth. For example, Meta Growth had LTM sales of close to C$60m at the close of the acquisition. The online platforms Grasscity, Smoke Cartel, FABCBD, Daily High Club and DankStop are expected to have a sales run rate of C$55m (which reflects its US wholesale but not online accessories outside of the US) going forward, not including any additional sales growth. Note that 80% of High Tide’s online revenue is US-based. Exhibit 16: M&A summary LTM LTM Value sales EBITDA Date Company (C$m) (C$m) (C$m) Notes 19-Dec-18 Grasscity.com 6.7 NA NA World’s #1 online store for smoking accessories and cannabis lifestyle products. 18-Nov-20 Meta Growth 31.6 57.0 -5.0 One of the largest brick-and-mortar cannabis retailers at the time. 24-Mar-21 Smoke Cartel 9.9 9.2 1.5 Second largest e-commerce platform for accessories in the world with 33m site visits in 2020. 3-May-21 FABCBD 25.6 13.4 5.3 US e-commerce marketplace for hemp-derived CBD products; gross margin of ~74%, EBITDA margin of ~40%. 25-Jun-21 Daily High Club 12.4 11.7 1.5 A top 5 e-commerce platform for accessories; EBITDA margin in low teens. 13-Jul-21 OneLeaf 2.9 NA NA HITI acquired a portfolio of six retail locations in Regina, (102105699 Saskatchewan. One is operational and five are in various Saskatchewan) stages of construction and development. All stores are expected to be operational by year-end FY21. 20-Jul-21 DankStop 4.8 3.7 NA A leading online consumption accessories retailer. EBITDA margin in the low double digits (we assume 10–12%). Source: Desjardins Capital Markets, company reports John Chu, CFA Amrit Sidhu, CPA, CA, High Tide Inc. Associate 16 SEPTEMBER 2, 2021 Financial overview and outlook We forecast very strong sales and EBITDA growth through to FY23, driven mostly by an increase in retail stores as well as robust growth from High Tide’s online platforms (which is mainly US-derived revenue). We are expecting some modest margin pressure (mostly from small price decreases for its retail operations) and declining revenue per store as competition (ie more retail stores) continues to ramp up. Exhibit 17: Financial snapshot 2021E Year-end Oct-31 (C$m) 2020 1Q 2Q 3QE 4QE 2021E 2022E 2023E Canadian retail sales 64.4 33.3 33.8 35.6 41.9 144.6 230.2 254.7 US retail sales 9.9 3.3 4.4 5.8 8.3 21.7 61.5 79.1 International retail sales 0.6 0.2 0.2 0.2 0.2 0.8 1.1 1.5 Wholesale sales (US and Canada) 7.9 1.6 2.5 2.9 3.3 10.2 18.9 29.4 Corporate sales 0.4 - - - - - - - Total sales 83.3 38.3 40.9 44.4 53.7 177.3 311.7 364.7 Gross margin 30.8 14.8 15.0 15.8 18.8 64.3 104.3 118.5 Gross margin (%) 37.0 38.5 36.7 35.5 35.0 36.3 33.5 32.5 Adjusted EBITDA 8.0 4.6 4.7 4.8 7.3 21.5 46.3 51.8 Adjusted EBITDA (%) 9.6 12.0 11.5 10.9 13.6 12.1 14.9 14.2 Note: In 2020, segmented revenue was not provided for US, international and wholesale revenue Source: Desjardins Capital Markets, FactSet Sales driven by new retail stores and strong growth from its online platforms, partially offset by declining revenue per store. We factor in new retail stores being added, offset by declining revenue per store due to dilution and pricing pressure. We also forecast strong growth from its online platforms. Store count driven primarily by Ontario. We estimate High Tide had 77 corporately owned stores as of 2Q FY21 (ended April 30), increasing to 84 by 3Q and 96 by the end of FY21. We assume the majority of the new stores are in Ontario (14 of 19), with the remainder in Alberta and Saskatchewan. We assume its store count will increase to 154 by the end of FY22, with the majority of the new stores in Ontario (40 of the 68 new stores for FY22), six in Alberta and four in Saskatchewan, and with the company making its first foray into BC with eight stores (through greenfield and M&A). For FY23, we have new stores slowing as High Tide reaches the maximum limit of stores any one entity can own (limit of 75 stores in Ontario, eight in BC). The company has been adding approximately three new stores per month across Canada since April 2021; with COVID-19-related restrictions starting to ease, we expect the company’s new store ramp-up to accelerate (especially in Ontario as the maximum store limit increases to 75 from 30 commencing in October 2021) over the next several quarters. As a result, we are comfortable with our new store count forecast (Exhibit 18). Exhibit 18: Store count—operational 2021 2022 Year-end Oct-31 (C$m) 1Q 2Q 3QE 4QE 2021E 1QE 2QE 3QE 4QE 2022E 2023E BC 0 0 0 0 0 2 4 6 8 8 8 Alberta 43 50 52 52 52 53 54 56 58 58 63 Saskatchewan 3 3 4 6 6 9 10 10 10 10 10 Manitoba 8 8 8 8 8 8 8 8 8 8 8 Ontario 10 16 20 30 30 40 50 60 70 70 75 Total 64 77 84 96 96 112 126 140 154 154 164 Source: Desjardins Capital Markets, FactSet John Chu, CFA Amrit Sidhu, CPA, CA, High Tide Inc. Associate 17 SEPTEMBER 2, 2021 Online platform. Through the acquisitions noted above (see Exhibit 16), the company has indicated an annualized revenue run rate of C$55m in the US, mostly driven by its various online platforms (ie 80% of the business is US-based). Recall that the C$55m includes US wholesale but not online accessories sold outside of the country. As a result, we forecast FY22 online sales (which is also reflective of its US and international sales) to more than double from FY21 levels, which reflects full-year revenue contributions of these acquisitions plus some additional growth. Declining revenue per store as a headwind. As we highlighted earlier, industry revenue per store has been declining as more stores have been added. We expect to see average revenue per store for both the industry and High Tide to continue trending downward as more stores are added. We use our estimated industry average revenue per store for each province (see Exhibit 5) as a basis for determining High Tide’s revenue per store (we estimate the company’s revenue per store has been higher than the industry average for each province in which it operates over the past several quarters). We estimate High Tide’s quarter-over-quarter decline in average revenue per store is lower than the industry average; in other words, we assume that its stores are better able to withstand the dilution pressures, either by having a stronger brand and/or a better location. We also factor in some pricing pressure into our revenue-per-store forecast as High Tide noted that it reduced prices last quarter to reflect competitive pressures. Exhibit 19: Our estimate of High Tide’s revenue per store by province Est avg monthly industry 2021 2022E 2023E 1 Year-end Oct-31 (C$) rev/store 1Q 2Q 3QE 4QE 1QE 2QE 3QE 4QE 1QE 2QE 3QE 4QE High Tide average 173,438 146,494 141,190 145,313 146,652 146,032 143,929 141,299 137,143 133,221 127,835 122,835 BC provincial average 132,000 138,000 132,000 130,000 125,000 120,000 115,000 110,000 105,000 100,000 95,000 90,000 85,000 AB provincial average 105,000 120,000 105,000 100,000 95,000 90,000 85,000 80,000 75,000 70,000 70,000 65,000 60,000 SK provincial average 210,000 230,000 210,000 185,000 180,000 175,000 170,000 165,000 160,000 155,000 150,000 145,000 140,000 MB provincial average 205,000 250,000 205,000 190,000 185,000 180,000 175,000 170,000 165,000 160,000 155,000 150,000 145,000 ON provincial average 235,000 325,000 235,000 220,000 215,000 210,000 205,000 200,000 195,000 190,000 185,000 180,000 175,000 1 For quarter ended April 2021 Note: Desjardins estimates based on monthly industry sales and our estimate of the number of stores each province has at month-end to determine average revenue per store; we then use that data as a benchmark to estimate High Tide’s average revenue per store run rates Source: Desjardins Capital Markets, FactSet, Statistics Canada, various sources Own-brand products. The acquisition of FABCBD gives High Tide its own-brand products which it can sell through its various online platforms and brick-and-mortar stores in Canada. The company is also close to introducing more of its own-brand cannabis products (eg dry flower, pre-rolls, vapes (using different LPs to manufacture these products on its behalf))—these products could be introduced as early as the end of the year, which could be a nice sales driver and margin boost. In traditional CPG retail stores, in-house brands can represent up to 20% of total store sales, so there is substantial sales upside by introducing in-house store brands within its retail stores. M&A. The company has been very active recently (acquired ~39 stores since December 2020 (33 corporately owned stores from Meta Growth and six stores in Saskatchewan (OneLeaf) in a separate transaction) and four online platforms since the beginning of 2021). Combined, these transactions had an LTM revenue run rate of ~C$95m. High Tide has stated that it plans to continue to be active on the M&A front whether it is acquiring stores (most likely in BC or Ontario) or other online platforms. M&A can be a meaningful sales growth catalyst for the company. However, we have not factored any M&A into our forecasts at this time. Margins. Gross margins have been in the mid- to high-30% range over the past several quarters but are declining. We expect continued pressure from increased competition, offset partially by increasing economies of scale from adding new stores. There is margin upside from product mix such John Chu, CFA as from having more cannabis 2.0 and premium product sales, more online and accessories revenue, Amrit Sidhu, CPA, CA, High Tide Inc. Associate 18 SEPTEMBER 2, 2021 and higher sales from its high-margin Cabanalytics sales data, as well as introducing its own-brand products to sell in its stores. Product mix. Cannabis 2.0 products are value-added products that generally receive a higher margin than 1.0 products (dry lower, pre-rolls), and the pandemic has likely acted as a headwind on 2.0 product sales as these newer products are likely purchased in-store with the assistance of a budtender. The sale of higher-margin premium flower products should also see a boost as store restrictions are lifted (these products are usually purchased with the assistance of a budtender as well). Higher in-store sales of accessories have a positive impact on margins as do High Tide’s online platforms as it manufactures most of its own lifestyle accessories (via its Valiant Distribution brand). High Tide is expected to launch its own-brand products (FABCBD, dry flower, pre-rolls, vapes) as early as later this year, which could generate higher margins (we estimate by more than 500bps). Cabanalytics a modest but high-margin business. While revenue represents a mid-single-digit percentage of total sales, it generates gross margins in the 90% range. Revenue has started to accelerate, from C$0.4m in 2Q FY20 to C$1.5m in 1Q FY21 and to C$2.9m in 2Q FY21. As High Tide builds out its store portfolio and as cannabis 2.0 products continue to ramp, the data analytic insights from its consumer sales data should become more valuable to interested parties. Synergies from Meta acquisition. Following the close of its acquisition of retailer Meta Growth in November 2020, High Tide identified ~C$8.5m in synergies to be realized. As of June 2021, ~71% of realized synergies (or C$6m of the total estimated C$8.5m) had been realized, with the remainder to be realized in the coming quarters; this should provide a bit of a margin boost going forward. Lower interest payments. The company extended the maturity date and reduced the related interest rate from 10% to 7% of convertible debt with a strategic partner in 2Q21. The reduction of senior secured debt helped lower interest payments (by more than C$3m), which should help drive operating margins modestly higher. Drop shipping technology. This is a technology that was acquired in the Smoke Cartel acquisition and essentially enables High Tide to connect with thousands of third-party vendors and their products without having to keep any of their inventory (ie better cash management)—essentially, the technology connects the buyer directly with each vendor through a common platform/entry point. High Tide plans to utilize this technology across most of its online platforms to increase the SKU listings, which should also help drive sales and margins as High Tide should be able to realize gross margins in excess of 40% for simply redirecting consumers directly with potentially thousands of third-party vendors. Increased competition. However, the competition could be temporary if there is a wave of store closures in highly competitive areas as we highlighted earlier in our report. We would also note that High Tide’s strategy to focus on plazas and strip malls could help mitigate the margin pressures from increasing competition. We expect the pressure from increased competition (especially in Ontario) to act as a meaningful headwind to margins going forward and to outweigh the above-listed margin drivers. Balance sheet looks strong. The company had C$29.4m in cash on its balance sheet at the end of 2Q FY21 (ended April 2021) and subsequently closed a C$23m bought deal financing in late May. It also filed a preliminary base shelf prospectus in early April for up to C$100m (which includes the bought deal in May). In early June, it announced the elimination of senior secured debt (ie its senior secured lender had converted substantially all of its debt into common shares of the company), which management believes brings it closer to finalizing a credit facility with a Canadian bank on standard commercial terms. Since the beginning of the year, High Tide has eliminated more than C$40m of debt, which stood at ~C$31.5m as of June 2021. We assume the capex (which includes initial start-up inventory) required for each new retail store opened is ~C$0.35m on average and is spent at least John Chu, CFA Amrit Sidhu, CPA, CA, High Tide Inc. Associate 19 SEPTEMBER 2, 2021 one quarter in advance of the store being operational. The company also intends to convert its acquired stores (eg Meta and NewLeaf) to Canna Cabana–branded stores by year-end (at a cost of ~C$30,000–40,000 to reface each store); this represents ~25 stores at an estimated total cost of up to C$1m. Valuation Given the company’s limited trading history, we look at valuation metrics of its peers (in both Canada and the US). Given the limited trading history of the cannabis retail sector, we also look at traditional retail stores (more so retail companies experiencing high growth). Lastly, given High Tide’s increasing exposure to e-commerce, we look at valuation metrics for online-focused retail companies as well. Given the different year-ends for several companies, we adjusted the sales and EBITDA estimates to reflect a calendar year-end basis to make them more comparable. Cannabis retailers. The peer group trades at ~18x NTM EBITDA (based on the average between 2021 and 2022 to reflect a more accurate NTM basis). Similarly, on an EV to NTM sales basis, we estimate the peer group average is ~1.4x. We should note that High Tide is estimated to generate the highest growth (2020–22) for both sales and EBITDA; it is generating higher margins and has a more diversified revenue base. It should therefore trade at a premium to the peer growth on both valuation metrics. Traditional high-growth retailers. This group includes companies that experience high sales growth and, not surprisingly, are trading at higher multiples than the more mature and slower- growing retailers. This high-growth retailer group is trading at ~2.7x on a forward-sales basis and in the high teens (18.8x) on a forward-EBITDA basis (excluding outliers). From a growth perspective (2020–22 CAGR), High Tide’s sales and EBITDA growth outlook (based on consensus estimates) is much stronger than the retail (high growth) average and higher than any single company within that group. Granted, High Tide has a limited trading history and its growth outlook is based off a lower base, but we believe that its valuation could eventually trade at a premium to this group. Online retailers. We look at this group given High Tide’s increasing exposure to e-commerce (recall that we estimate e-commerce could represent close to 27% of FY23 sales). The valuation metrics are similar to the high-growth retailer group, with forward EBITDA in the mid-teens range and forward-sales multiples in the low-2.0x range (excluding outliers). We believe we should be using the online retailer multiple average as a benchmark for High Tide’s e-commerce segment, which is a premium to where the cannabis retailers are trading. We also note that our sales growth forecast for High Tide’s online sales (where we forecast FY22 more than doubling vs FY21 levels) is much stronger than the sales growth outlook for the online peer group. This suggests that High Tide’s online platform should receive a premium valuation multiple relative to the online peer group. Taking all of these valuation benchmarks into account, we apply an 18.0x EBITDA multiple for the period from 3Q FY22–2Q FY23, which equates to a one-year target of C$15. The 18.0x multiple reflects the high-growth retailer group (excluding outliers). Given High Tide’s superior growth outlook (both sales and EBITDA), its higher margin and more diversified revenue base, it should eventually trade at a premium to the cannabis peer group. As a cross-check, applying a 2.7x sales multiple (the average for the high-growth retail peer group) equates to a target of C$15.55, which helps reconfirm that our target is within range. Initiating coverage with a Buy–Average Risk rating and C$15 one-year target. Given the lower risk profile of the cannabis retail segment and the consistently strong numbers High Tide has posted (growing sales and five consecutive quarters of positive and growing adjusted EBITDA), we believe an Average Risk qualifier is reasonable (vs Above-average Risk for most of the companies in our coverage universe). We believe our valuation multiple is conservative and could trend above the high-growth John Chu, CFA Amrit Sidhu, CPA, CA, High Tide Inc. Associate 20 SEPTEMBER 2, 2021 traditional retailers given High Tide’s superior growth outlook. As High Tide continues to post strong financial results, we expect it to draw more investor interest going forward. Sensitivities to our numbers. We highlight the impact that changes to some of our key assumptions may have on our forecast and target. Exhibit 20: Sensitivity table Absolute impact on: Metric/driver Delta FY22E sales (C$m) FY22E EBITDA (C$m) Target price (C$) Store count 5 12.2 2.10 0.25 Revenue per store ~5% 22.0 2.20 0.60 Gross margin 100bps 3.10 0.40 Multiple 1.0x 0.80 Source: Desjardins Capital Markets Catalysts and risks We list several catalysts and risks that may impact High Tide and the retail sector as a whole. Catalysts Higher store ownership limits. In Ontario, the maximum number of stores any one entity can own is slated to increase to 75 (from 30) starting in October 2021. BC meanwhile has a limit of eight stores per entity. Either province increasing the maximum number would present an opportunity for larger players such as High Tide to increase their store count. Store closures. With pockets throughout Canada oversaturated with stores, selected closures could alleviate the competitive pressure to a certain extent. Online sales. Ontario and Alberta are both reviewing the possibility of allowing private retailers to permanently sell using an e-commerce platform. This would open up an additional 10%+ of the market opportunity that was generally not available previously. US federal legalization. When/if the US eventually legalizes cannabis, this should create an opportunity for retailers to expand into the country. This would be particularly beneficial for High Tide given it already has a presence in the US selling smoking accessories and hemp-based CBD products through its online platforms. Retailers dealing directly with LPs. Retailers generally deal with the provincial wholesalers instead of directly with the LPs. If the major provinces allow retailers to deal directly with the LPs, that could improve logistics and reduce costs. This could be more beneficial for larger players such as High Tide in terms of better economies of scale. M&A. High Tide is expected to remain active on the M&A front, and given its track record of accretive transactions, additional transactions should be positive for the company. In-house/own-brand products. Given the success that traditional major CPG retailer chains have experienced with own-brand/private label product sales, High Tide should be able to realize similar benefits in terms of higher sales and margins when it starts to introduce more in-house products. Takeout and/or strategic partner. As one of the largest cannabis retailers in Canada, High Tide could be a takeout (or strategic partner) candidate by a major CPG retailer looking to gain access to the cannabis sector. John Chu, CFA Amrit Sidhu, CPA, CA, High Tide Inc. Associate 21 SEPTEMBER 2, 2021 Risks Increased competition. As more stores open, it can create oversaturation to the detriment of the majority of stores. It can also create price wars as struggling stores lower prices to drive sales, which would lower margins across the board (at least for nearby stores). We expect the pressure from increased competition (especially in Ontario) to act as a meaningful headwind to margins going forward. Operational risk. High Tide is expanding its store count at a rapid rate, and there could be some operational and execution risk; however, given the number of stores it has opened thus far and the recent rate of new store openings, the company has proven capable of mitigating this risk. Integration risk. The company has been very active on the M&A front, especially on the e-commerce side, which may pose some integration risk. We are less concerned with integration risk on the retail store front given the success it has had with Meta Growth. Access to capital. While the company has had access to capital recently, the markets may start to become more challenging going forward. Regulatory changes. Changes that may impact the number of stores, zoning restrictions and/or other policies may negatively impact the cannabis sector as well as the retail sector. John Chu, CFA Amrit Sidhu, CPA, CA, High Tide Inc. Associate 22 SEPTEMBER 2, 2021 ESG overview The nascent cannabis sector has been making efforts to improve in all areas of ESG while also trying to manage significant growth in an ever-evolving sector. As a retailer, HITI does not face the same ESG concerns as an LP, but it nonetheless follows ESG practices and is building positive momentum. The company is focused on reducing its carbon emissions, promoting recycling and energy conservation, and has safety and training protocols for its employees. There is room for improvement in all areas (eg community relations, diversity) but it has made solid progress for an early-stage company of its size. Materiality issue Management process, controls and measurement Momentum Environmental GHG emissions/air quality. Risks Uses reusable tags and is working on electronic labels. Neutral. The company is not a associated with polluting the Aims to reduce carbon emissions from buildings and operations; its heavy emitter. environment and air quality stores are generally smaller in size and not heavy emitters. through excessive GHG emissions at its operations. Waste and hazardous materials Prior to COVID-19, HITI participated in a program aimed at reducing Positive. Taking an initiative to management. This category waste (ie offering consumers options to recycle empty packs). This reduce waste. addresses environmental issues program has been on hold since the COVID-19 pandemic began. associated with hazardous and non- It does not use single-use plastic bags. hazardous waste generated by companies, as well as a company’s Metric management of solid waste in ‒ Amount of waste generated is not tracked currently. manufacturing, agriculture and ‒ Percentage diverted from the waste stream is not tracked currently. other industrial processes. Energy management. This Utilizes LED lighting to reduce energy consumption. Positive. Actively manages its category addresses environmental Conducts sustainability cost avoidance initiatives to reduce expenses energy and water usage. impacts associated with energy related to wasteful usage of energy and appliances. consumption. It addresses the HITI aims to minimize water use (ie automatic faucets and water company’s management of energy dispensers). in manufacturing and/or for the provision of products and services Metric derived from utility providers (grid ‒ Operational energy consumed is not tracked currently. energy) not owned or controlled ‒ Percentage grid electricity is not tracked currently. by the company. ‒ Percentage renewable: NA. Social Data security. This category It has security protocols in place (ie Secure Sockets Layer which Positive. HITI has data security addresses management of risks establishes an encrypted link between a server and a client). protocols and measures in place. related to the collection, retention It has an internal IT team to ensure there are no data breaches. and use of sensitive, confidential, It has mandatory cybersecurity training for all employees. and/or proprietary customer or user data. It includes social issues Metric that may arise from incidents such ‒ Number of data breaches: none. as data breaches in which ‒ Percentage involving personally identifiable information: none. personally identifiable information ‒ Number of customers affected: none. (PII) and other user or customer data may be exposed. Product quality and safety. This Risk of product sourcing is mitigated as all products are overseen by Positive. Works within the highly category addresses incorporating regulatory bodies, ie Health Canada (and in Ontario the OCS, which regulated industry framework. ESG considerations in the serves as the wholesaler for the province). characteristics of products and Involvement with individual retailers is limited (until it produces its own services provided or sold by the branded products); vendors must also meet all Canadian federal and company. It includes, but is not provincial consumer product guidelines. limited to, managing the lifecycle impacts of products and services, Metric such as those related to packaging, ‒ Adheres to highly regulated Health Canada standards. distribution, use-phase resource ‒ Percentage of units recalled that are private label products: none. intensity and other environmental and social externalities that may occur during their use phase or at the end of life. John Chu, CFA Amrit Sidhu, CPA, CA, High Tide Inc. Associate 23 SEPTEMBER 2, 2021 Materiality issue Management process, controls and measurement Momentum Selling practices and product HITI does not have any incidents of non-compliance with industry or Neutral. This category is more labelling. This category addresses regulatory labelling and/or marketing codes, as these issues do not applicable to the manufacturers of social issues that may arise from a apply to retailers (vs licensed producers). the products than the retailers. failure to manage the transparency, accuracy and comprehensibility of Metric marketing statements, advertising, ‒ Total amount of monetary losses as a result of legal proceedings and labelling of products and associated with marketing/labelling: none. services. It includes, but is not limited to, advertising standards and regulations, ethical and responsible marketing practices, misleading or deceptive labelling, as well as discriminatory or predatory selling and lending practices. Labour practices. This category Hires employees locally. Positive. Adheres to commonly addresses the company’s ability to Provides training for new hires and regular refreshers for existing accepted labour standards. uphold commonly accepted labour employees to minimize employee safety risks (eg learning management standards in the workplace, system software). including compliance with labour Employees undergo regular training on dos and don’ts when dealing laws and internationally accepted with shoplifters or erratic customers. norms and standards. This Adheres to Health Canada regulations. includes, but is not limited to, Helps protect employees and keep them safe (eg by installing alarms, ensuring basic human rights panic buttons and cameras, and implementing the Checkmate program related to child labour, forced or (ie lone worker monitoring)). bonded labour, exploitative labour, fair wages and overtime Metric pay, and other basic workers’ ‒ Store locations generally have to engage in a 15-day public notice rights. It also includes minimum period before final licence approval is granted. wage policies and provision of ‒ Employee turnover-rate has not been disclosed since the COVID-19 benefits, which may influence how pandemic began. a workforce is attracted, retained ‒ Number of work stoppages: none. and motivated. The category ‒ Total days idle: none. further addresses a company’s ‒ Total amount of monetary losses as a result of legal proceedings relationship with organized labour associated with labour law violations and employment discrimination: and freedom of association. ~C$50,000. Governance Diversity. Risk that the company Metric Positive. The company is an equal does not appropriately support ‒ Percentage of women (1) in senior management (vice-president and opportunity employer. diversity within the organization. above)—30%; (2) on the board of directors—20%; and (3) as a proportion of total number of employees—~50%. Fair labour and compensation. Full-time employees have benefits. Positive. Compensates employees Risk of failure to uphold employee Hourly store employees are paid above their province’s minimum fairly. rights and provide adequate wage. employee benefits, leading to higher turnover. Metric ‒ Participates in research to gain feedback and insight into market compensation and worker satisfaction trends. ‒ Percentage of in-store and distribution centre employees earning minimum wage by region: 10%. ‒ Percentage of active workforce covered under collective bargaining agreements: ~2%. Legal and regulatory environment. No formal whistleblower policy in effect. Positive. Meets its legal and Risk that the company’s failure to Adheres to laws and regulations. regulatory obligations. comply with laws or regulations NASDAQ listing adds another layer of regulations it needs to adhere to. could result in fines or penalties. Metric ‒ Fulfills its obligations to all regulatory boards. John Chu, CFA Amrit Sidhu, CPA, CA, High Tide Inc. Associate 24 SEPTEMBER 2, 2021 Comparables table Exhibit 21: Comparables summary Price Mkt Aug-31 cap EV 2020–22E CAGR (%) EV/EBITDA (x) EV/sales (x) Company name Ticker Curr ($) ($m) ($m) Sales EBITDA 2021E 2022E 2021E 2022E Cannabis retail Choom Holdings Inc CHOO-CNQ C$ 0.07 21 50 Inner Spirit Holdings Ltd. ISH-CNQ C$ 0.38 112 105 Fire & Flower Holdings Corp. FAF-CA C$ 0.94 303 293 38 21.5 21.9 1.4 1.2 High Tide Inc. HITI-CA C$ 9.25 443 446 68 89 15.8 8.6 2.0 1.5 Nova Cannabis Inc NOVC-CA C$ 2.87 151 191 -31.2 1.4 Harborside Inc. HBOR-CNQ C$ 1.10 65 44 33 95 4.7 1.4 0.4 0.3 MedMen Enterprises, Inc. Class B MMEN-CNQ C$ 0.35 318 216 1.2 Planet 13 Holdings, Inc. PLTH-CNQ C$ 6.13 882 1,064 59 158 28.0 14.8 6.4 4.6 Average 50 114 7.8 11.7 2.1 1.9 Average (ex outliers) 46 92 21.7 15.1 1.5 1.4 Retail (high-growth) Lululemon Athletica Inc LULU-US US$ 400.17 51,795 52,021 27 28 35.3 30.9 8.8 7.3 Dollarama Inc. DOL-CA C$ 57.53 17,664 21,161 9 12 16.8 14.9 4.9 4.4 Five Below, Inc. FIVE-US US$ 212.81 12,011 12,754 29 55 28.8 23.8 4.6 3.9 Aritzia, Inc. ATZ-CA C$ 41.23 4,673 5,145 26 71 26.6 21.0 4.5 3.7 Urban Outfitters, Inc. URBN-US US$ 33.02 3,340 3,941 15 7.1 0.9 0.9 Dollar Tree, Inc. DLTR-US US$ 90.54 20,451 29,735 4 1 11.9 11.4 1.1 1.1 Dollar General Corporation DG-US US$ 222.91 52,579 66,330 4 0 17.2 15.9 1.9 1.8 Average 16 28 20.5 19.6 3.8 3.3 Average (ex outliers) 24 20 20.2 17.4 3.0 2.6 Retail (traditional) Empire Co. Ltd. Class A EMP.A-CA C$ 40.80 6,867 17,435 4 4 8.0 7.5 0.6 0.6 Metro Inc. MRU-CA C$ 64.27 15,716 19,981 1 4 11.4 10.8 1.1 1.1 Loblaw Companies Limited L-CA C$ 88.89 30,064 44,946 1 6 8.2 8.0 0.9 0.8 McKesson Corporation MCK-US US$ 204.14 31,755 39,687 4 7 8.4 8.4 0.2 0.2 Alimentation Couche-Tard Inc. Class B ATD.B-CA C$ 50.98 55,754 64,504 13 -3 10.9 10.7 0.9 0.9 Freshii, Inc. Class A FRII-CA C$ 2.14 56 37 Average 5 3 9.4 9.1 0.7 0.7 Average (ex outliers) 3 4 9.4 9.1 0.9 0.8 Retail (online) eBay Inc. EBAY-US US$ 76.74 52,474 44,694 1 3 11.2 10.7 4.1 4.1 Alibaba Group Holding Ltd. 9988-HK HK$ 165.50 3,441,630 3,375,120 30 11 14.7 12.4 3.2 2.7 Amazon.com, Inc. AMZN-US US$ 3,470.79 1,786,540 1,816,217 21 26 24.6 19.8 3.8 3.2 Duluth Holdings, Inc. Class B DLTH-US US$ 15.56 529 684 10 22 9.8 1.0 0.9 Groupon, Inc. GRPN-US US$ 24.77 742 591 -13 98 4.8 3.0 0.6 0.6 1-800-FLOWERS.COM, Inc. Class A FLWS-US US$ 31.76 2,168 2,211 15 14 10.3 1.0 0.9 Overstock.com, Inc. OSTK-US US$ 72.15 3,180 2,645 13 50 18.1 13.3 0.9 0.8 PC Connection, Inc. CNXN-US US$ 48.41 1,297 1,172 6 14 11.8 10.4 0.4 PetMed Express, Inc. PETS-US US$ 27.54 584 445 -1 11.6 1.5 1.5 Stamps.com Inc. STMP-US US$ 328.90 6,658 5,539 7 1 25.3 20.1 7.2 6.3 Chewy, Inc. Class A CHWY-US US$ 88.12 38,754 37,435 22 108 4.2 3.5 Average 10 35 14.5 12.7 2.7 2.3 Average (ex outliers) 12 7 11.5 10.2 2.5 2.0 Source: Desjardins Capital Markets, FactSet John Chu, CFA Amrit Sidhu, CPA, CA, High Tide Inc. Associate 25 SEPTEMBER 2, 2021 Appendix 1: Management team and board of directors Senior management has extensive experience with retail and CPG which, in a fragmented cannabis retail market, should be advantageous as High Tide builds out its retail portfolio. Management also has experience within regulated industries (eg beer), which should prove helpful in what is an ever- changing regulatory environment. Exhibit 22: Management team Name Position Experience/past occupations Harkirat (Raj) Grover CEO, president and Mr Grover is the founder of High Tide. He has more than 10 years of director previous board/leadership experience as founder of High Tide’s subsidiaries Valiant Distribution and Canna Cabana and as co-founder of subsidiary Famous Brandz. Aman Sood COO Mr Sood has more than 20 years of retail, project management, operations, technology and cost-optimization experience. He was director of operations at Meta Growth prior to its acquisition (in November 2020) by High Tide and regional manager of NewLeaf prior to its acquisition (in March 2019) by High Tide. Prior to that, Mr Sood was a regional manager at Value Village. Rahim Kanji CFO Mr Kanji has more than 18 years of board/leadership experience in various industries (ie start-up technology and enterprise oil & gas). His last position was COO of Kudos; prior to that, he was a controller at Solium Capital. Sean Geng Chief technology Mr Geng has more than 10 years of tech, e-commerce and cannabis officer industry experience. Mr Geng joined High Tide after the company acquired Smoke Cartel (March 2021), which he founded. Mr Geng also previously managed Namaste Technologies’ e-commerce platform. Source: Desjardins Capital Markets, FactSet, company reports, company website Exhibit 23: Board of directors Name Position Experience/past occupations Harkirat (Raj) Grover CEO, president and See management biography. executive chairman Nitin Kaushal Director Mr Kaushal has more than 30 years of financial services experience. He is also currently the president of Anik Capital. His last position was corporate finance managing director at PWC. Arthur Kwan Director Mr Kwan has more than 20 years of capital markets (investment banking and private equity) experience. He has held senior investment banking positions with Scotia Capital, PI Financial and Paradigm Capital. Christian Sinclair Director Chief Sinclair was a board member of Meta Growth prior to its acquisition by High Tide. He is a member of the Opaskwayak Cree Nation in Manitoba and co-chair of the province’s Northern Economic Development Strategy. He has worked with aboriginal groups focused on corporate development for major natural resource projects related to hydro, mining and oil & gas since 2002. Chief Sinclair is well-regarded by First Nations communities throughout Manitoba and is an important link between Indigenous communities and the province of Manitoba in development projects and partnerships. Andrea Elliott Director Ms Elliot has CPG, retail and leadership experience. She is currently the executive vice-president of direct-to-consumer sales at Moose Knuckles Canada. Ms Elliott founded r2 retail resources, an independent consultancy for retailers. Her last position was as vice-president and general manager of PVH Canada Retail (ie owns Calvin Klein and Van Heusen brands) prior to that, she was an executive vice-president at PWC and COO at Karabus Management (a subsidiary of PWC). Source: Desjardins Capital Markets, FactSet, company reports, company website John Chu, CFA Amrit Sidhu, CPA, CA, High Tide Inc. Associate 26 SEPTEMBER 2, 2021 Exhibit 24: Top five insiders/stakeholders Insiders/stakeholders Position % shares O/S Position (000) Harkirat (Raj) Grover CEO 13.0 6,478 Sean Geng CTO 0.5 258 Rahim Kanji CFO 0.4 183 Arthur Kwan Director 0.2 109 Michael Cosic Former CFO 0.1 43 14.24 7,071 Source: Desjardins Capital Markets, FactSet Appendix 2: Financial statement projections Exhibit 25: Key financial metrics—income statement Year-end Oct-31 (in C$m) 2020 1Q21 2Q21 3Q21E 4Q21E 2021E 2022E 2023E Net sales 83.3 38.3 40.9 44.4 53.7 177.3 311.7 364.7 COGS -52.5 -23.6 -25.9 -28.7 -34.9 -113.0 -207.4 -246.1 Gross profit 30.8 14.8 15.0 15.8 18.8 64.3 104.3 118.5 G&A -23.1 -10.2 -10.3 -10.9 -11.5 -42.9 -58.0 -66.7 D&A -6.8 -6.1 -7.7 -3.1 -3.8 -21.7 -21.3 -23.7 Stock-based compensation -0.1 -0.6 -1.5 -1.6 -2.0 -5.7 -9.4 -9.1 Operating income 0.8 -2.0 -4.5 0.1 1.5 -4.9 16.7 19.0 Interest expense -10.0 -4.3 -3.7 -0.3 -0.3 -8.6 -1.2 -1.0 Other 0.0 -9.9 -4.2 0.0 0.0 -14.1 0.0 -1.0 Earnings before taxes -5.4 -16.3 -12.4 -0.2 1.3 -27.6 15.6 18.0 Income taxes -0.2 -0.6 0.1 0.1 -0.4 -0.8 -4.4 -4.0 Net income -5.6 -16.8 -12.3 -0.2 0.9 -28.4 11.2 12.9 Adjusted EBITDA 8.0 4.6 4.7 4.8 7.3 21.5 46.3 51.8 EPS basic (C$) -0.03 -0.04 -0.02 -0.00 0.02 -0.04 0.25 0.29 EPS fully diluted (C$) 0.00 -0.01 -0.00 0.05 0.08 0.12 0.51 0.57 Shares O/S basic (m) 217 406 620 44 45 45 45 45 Shares O/S fully diluted (m) 217 697 911 63 64 64 64 64 Source: Desjardins Capital Markets, company reports John Chu, CFA Amrit Sidhu, CPA, CA, High Tide Inc. Associate 27 SEPTEMBER 2, 2021 Exhibit 26: Key financial metrics—balance sheet and cash flow statement Year-end Oct-31 (in C$m) 2020 1Q21 2Q21 3Q21E 4Q21E 2021E 2022E 2023E Assets Cash and cash equivalents 7.5 16.6 29.4 47.2 46.5 46.5 45.2 63.9 Short-term investments 0.1 0.9 1.2 1.2 1.2 1.2 1.2 1.2 Trade and other receivables 2.9 3.5 4.8 2.7 3.2 3.2 5.3 5.4 Prepaids 3.1 4.4 6.0 8.9 10.7 10.7 17.8 18.1 Current portion of loans receivable 0.1 1.5 1.5 1.5 1.5 1.5 1.5 1.5 Inventory 5.7 9.7 11.9 11.6 14.0 14.0 23.1 23.5 Asset classified as held for sale 0.0 0.0 1.7 1.7 1.7 1.7 1.7 1.7 Total current assets 19.3 36.5 56.3 74.7 78.7 78.7 95.7 115.3 Loans receivable 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 Long-term prepaid expenses and deposits 0.8 1.5 1.5 1.5 1.5 1.5 1.5 1.5 Equipment and leaseholds 13.1 20.6 21.5 25.8 29.4 29.4 30.3 24.0 Investment 1.7 1.8 0.8 0.8 0.8 0.8 0.8 0.8 Right-of-use assets 16.4 27.5 26.0 26.0 26.0 26.0 26.0 26.0 Promissory note receivable 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Goodwill and intangibles 18.0 78.2 93.4 93.4 93.4 93.4 93.4 93.4 Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Future tax asset 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 Total assets 69.8 166.6 200.1 222.6 230.4 230.4 248.2 261.5 Liabilities Trade and other payables 6.4 9.1 12.4 9.8 11.8 11.8 19.5 19.9 Note payable 1.9 4.1 4.1 4.1 4.1 4.1 4.1 4.1 Deferred liability 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7 Current portion of convertible debentures 14.4 15.5 3.4 3.4 3.4 3.4 3.4 3.4 Current portion of lease liabilities 2.2 5.2 5.2 5.2 5.2 5.2 5.2 5.2 Derivative liability 0.8 11.5 15.2 15.2 15.2 15.2 15.2 15.2 Other 0.0 0.0 1.1 1.1 1.1 1.1 0.0 0.0 Total current liabilities 27.5 47.0 43.0 40.4 42.5 42.5 49.1 49.5 Notes payable 2.5 12.3 12.6 12.6 12.6 12.6 12.6 12.6 Lease liabilities 14.5 23.5 20.9 20.9 20.9 20.9 20.9 20.9 Convertible debenture 11.4 24.0 9.2 9.2 9.2 9.2 9.2 9.2 Deferred tax liability 2.2 5.9 0.0 0.0 0.0 0.0 0.0 0.0 Other 0.1 0.0 7.8 7.8 7.8 7.8 7.8 7.8 Total liabilities 58.1 112.8 93.5 90.9 93.0 93.0 99.6 100.0 Total equity 11.7 53.8 106.5 131.7 137.4 137.4 148.6 161.5 Total liabilities and equity 69.8 166.6 200.1 222.6 230.4 230.4 248.2 261.5 Cash flow from operations 7.2 1.4 -4.1 4.5 5.9 7.7 1.4 -4.1 Net cash flow from investing -3.3 8.2 -9.1 -12.0 -11.4 -24.2 -5.9 -5.9 Net cash from financing 1.2 -0.6 25.9 25.3 4.8 55.4 0.0 0.0 Net change in cash -5.7 9.1 12.8 17.9 -0.7 38.9 -4.5 -0.8 Free cash flow 4.9 -0.2 -6.2 -7.5 -5.5 -19.4 -4.5 -0.8 Capex -0.3 1.7 2.2 8.1 11.4 23.4 21.2 17.4 Source: Desjardins Capital Markets, company reports John Chu, CFA Amrit Sidhu, CPA, CA, High Tide Inc. Associate 28 SEPTEMBER 2, 2021 Appendix 3: A quick overview of the Canadian cannabis sector Reported recreational cannabis sales in Canada totalled C$2.6b in 2020, up ~120% yoy vs the C$1.2b reported in 2019 according to Statistics Canada. Canada is currently on track for sales of >C$3.6b in 2021, which would represent a ~40% increase vs 2020. Sales momentum has been strong despite COVID-19-related headwinds (eg store restrictions, delays in new store openings) as well as provincial wholesaler destocking. Based on Ontario data, brick-and-mortar stores have generally represented more than 90% of industry sales, with the remainder derived from online purchases. Store restrictions (eg curbside pickup only) and the delay of new store openings likely suppressed industry sales. We also believe that not having access to budtenders impacted industry sales, especially in relation to premium/super premium products as well as new product formats (eg cannabis 2.0 products such as beverages, concentrates (eg hash, rosin, caviar, etc), gummies, chocolates and vapes), which are generally higher-margin products. Overall, sales momentum has remained robust and should see continued growth as pandemic-related store restrictions ease. Exhibit 27: Canadian industry sales showing tremendous momentum 150 350 319 300 125 257 270 297 306 313 252 298 233 279 261 250 Provincial sales (C$m) 262 Federal sales (C$m) 100 201 181 178 186 200 75 154 152 146 127 129 136 150 123 104 50 86 91 100 75 61 54 54 57 55 52 25 50 0 0 Jan-19 Mar-19 May-19 Jan-20 Mar-20 May-20 Jan-21 Mar-21 May-21 Dec-18 Feb-19 Jul-19 Sep-19 Dec-19 Feb-20 Jul-20 Sep-20 Dec-20 Feb-21 Oct-18 Nov-18 Apr-19 Oct-19 Nov-19 Apr-20 Oct-20 Nov-20 Apr-21 Jun-19 Aug-19 Jun-20 Aug-20 Jun-21 Québec (LHS) Ontario (LHS) Alberta (LHS) Canada (RHS) Source: Desjardins Capital Markets, Statistics Canada Our estimate of the cannabis market opportunity in Canada is ~C$10b, with close to 90% of that representing the recreational/adult-use market. Based on Colorado sales trends and how closely Canada followed this in the early years (Exhibit 28), we believe Canada can reach more than C$7b in recreational sales by 2025. Key industry sales drivers are more retail stores, improving quality and more competitive prices. John Chu, CFA Amrit Sidhu, CPA, CA, High Tide Inc. Associate 29 SEPTEMBER 2, 2021 Exhibit 28: Canada sales trends tracking Colorado trends closely at 32 months post-legalization 8 Sales multiple increase since legalization 6 4 2 0 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 1 2 3 4 5 6 7 8 9 # of months since legalization Canada rec sales Colorado Source: Desjardins Capital Markets, Statistics Canada Edibles to be a meaningful sales and margin catalyst for retailers Looking at sales data from Colorado, while the market share of dry flower declined to 54.1% in 2017 from 66.1% in 2014 (Exhibit 29), dry flower sales volume increased more than sixfold (to close to 240,000lbs of recreational dry flower sold from 38,000lbs). It appears that cannabis 2.0 products increased the size of the market opportunity—ie cannabis 2.0 products drove new users into the legal market and converted black market users as well. We expect the launch of cannabis 2.0 products in Canada in 2020 to have a similar effect, where the overall market size gets bigger as opposed to seeing users switch from purchasing dry flower products to cannabis 2.0 products, which should help stem the decline in revenue per store. We also note that the sale of 2.0 products generates a higher margin for retailers (and LPs) compared with 1.0 products (dry flower, pre-rolls) given the value- added nature of 2.0 products. Hence, with retail store restrictions loosening and as the pandemic starts to fade, we would expect to see 2.0 sales start to accelerate as consumers return to in-store purchases, which should also help drive retailer margins higher. Exhibit 29: Colorado flower sales losing market share to cannabis 2.0 products 300 70% 250 60% 200 50% (000lbs) 150 40% 100 30% 50 20% 0 10% 2014 2015 2016 2017 Flower sales (LHS) Flower market share (RHS) Source: Desjardins Capital Markets, MPG, New Frontier, Statista John Chu, CFA Amrit Sidhu, CPA, CA, High Tide Inc. Associate 30 SEPTEMBER 2, 2021 Overview of the retail landscape and its role in growing the cannabis industry As new as the cannabis sector is, so too is the retail landscape. New store rollouts have been considerably slower than expected but have accelerated over the past couple of quarters. The growing pains that have plagued the cultivation segment (slow ramp-up, poor-quality product, limited product choices) were also rampant in the retail segment (very slow store rollouts being the primary factor). Canada’s three largest provinces by population (Ontario, Québec and BC) got off to very slow starts rolling out new retail stores and remain underserved, with a runway to add many more stores. In this section, we look at the different retail frameworks for each province. Cannabis regulations and distribution similar to the alcohol sector. The cannabis industry is similar to the highly regulated alcohol sector, with the regulatory bodies that oversee alcohol assigned to do likewise for cannabis for most of the provinces across Canada. As is the case with alcohol, most provinces will be the single wholesale buyer and will control the wholesale selling prices for cannabis, which is generally assessed on a quality-based tiering or grading system (‘good’, ‘better’, ‘best’ or some similar ranking system). As we highlight in Exhibit 30, Alberta, Saskatchewan, Manitoba, Ontario and Newfoundland employ a cannabis retail model similar to what Alberta employs with alcohol, whereby the province acts as the distributor but the retail market is run by the private sector. Québec, New Brunswick, Nova Scotia and PEI employ a model where the province is both the distributor and retailer. BC uses a hybrid of the two systems. Exhibit 30: Provincial retailer regulations Province Regulatory body Legal age Distribution Online sales In-store sales BC BC government 19 Government Government Government/private Alberta Alberta Gaming Liquor and Cannabis 18 Government Government Private Saskatchewan The Saskatchewan Liquor and Gaming Authority 19 Private Private Private Manitoba Liquor, Gaming and Cannabis Authority of Manitoba 19 Government Private Private Ontario The Alcohol and Gaming Commission of Ontario 19 Government Government Private Québec Société Québécoise du Cannabis (SQDC) 21 Government Government Government New Brunswick Government of New Brunswick 19 Government Government Government Newfoundland Newfoundland Labrador Liquor Corporation 19 Government Government Private Nova Scotia Nova Scotia Liquor Corporation 19 Government Government Government PEI PEI Cannabis Management Corporation 19 Government Government Government Source: Desjardins Capital Markets, company documents, various sources The cannabis retail sector has several barriers to entry. The regulated nature of the cannabis industry provides some protection for existing industry retail players given the following: Retail licences need to be approved before a new store can be opened and the provinces have set targets as to the number of stores each plans to have and/or is slowly issuing new licences. In some cases, the province has set limits on the maximum number of stores an operator can own. A public notice is also generally required, and the store must be completely built before it can be inspected and receive its licence. Zoning restrictions (must be a certain distance from schools and other dispensaries and/or from neighbourhood homes, etc) help limit competition and increase set-up costs. Most provinces have zoning restrictions, but Ontario’s does stipulate a minimum distance between dispensaries. The approval process should help limit competition. The Ontario and BC governments are also taking a more pragmatic approach with rolling out new stores and making sure there are sufficient stores to combat the black market. While the timing of licence approvals is unpredictable, when one is awarded a licence, we understand it can take less than two months (and less than six weeks in some cases) to construct/renovate a store to comply with Health Canada regulations (security, cameras, vault/storage, etc) and be operational (although COVID-19 has slowed the process considerably). Capex per store averages out to ~C$0.3m regardless of province, but the total footprint does impact capex. Working capital John Chu, CFA (inventory) typically averages C$0.5m. Amrit Sidhu, CPA, CA, High Tide Inc. Associate 31 SEPTEMBER 2, 2021 DISCLOSURES COMPANY-SPECIFIC DISCLOSURES The Desjardins Capital Markets research analyst(s) and/or associate(s) had communication with High Tide Inc. regarding the verification of factual material in this research publication. Desjardins Capital Markets has performed investment banking services for High Tide Inc., Alimentation Couche-Tard Inc. and Loblaw Companies Limited in the past 12 months. Desjardins Capital Markets has received compensation for investment banking services from High Tide Inc., Alimentation Couche-Tard Inc. and Loblaw Companies Limited within the past 12 months. Desjardins Capital Markets has managed or co-managed a public offering of securities for Alimentation Couche-Tard Inc. and Loblaw Companies Limited in the past 12 months. Desjardins Capital Markets has received compensation for non-investment banking, non-securities-related services from Alimentation Couche-Tard Inc., Loblaw Companies Limited and Metro Inc. in the past 12 months. Alimentation Couche-Tard Inc., Loblaw Companies Limited and Metro Inc. is/are a client for which a Desjardins Capital Markets company has performed non-investment banking, non-securities related services in the past 12 months. Alimentation Couche-Tard Inc., Loblaw Companies Limited and Metro Inc. is/are (or was/were) a client of Desjardins Capital Markets or an affiliate within the Desjardins Group within the past 12 months and received non-securities related services. xAn officer or director of Desjardins Capital Markets, outside of the Equity Research Department, or a member of his/her household is an officer or director of Alimentation Couche-Tard Inc. or acts in an advisory capacity to Alimentation Couche- Tard Inc. The Desjardins Capital Markets research analyst(s) and/or associate(s) has viewed a material operation of Loblaw Companies Limited and Metro Inc., which includes but is not limited to mines, distribution centres, warehouses, production plants and/ or other facilities related to the day-to-day operations of Loblaw Companies Limited and Metro Inc. as applicable, and the related travel expenses have not been paid for by the issuer. ANALYST CERTIFICATION Each Desjardins Capital Markets research analyst named on the front page of this research publication, or at the beginning of any subsection hereof, hereby certifies that (i) the recommendations and opinions expressed herein accurately reflect such research analyst’s personal views about the company and securities that are the subject of this publication and all other companies and securities mentioned in this publication that are covered by such research analyst, and (ii) no part of the research analyst’s compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by such research analyst in this publication. STOCK RATING SYSTEM Top Pick Buy Hold Sell Not Rated Desjardins’ best investment Stocks that are Stocks that are Stocks that are expected Stock is being ideas—stocks that offer the expected to expected to perform to underperform their covered exclusively best risk/reward ratio and that outperform their in line with their respective peer group* over on an informational are expected to significantly respective peer group* respective peer group* a 12-month period (includes basis outperform their respective over a 12-month period over a 12-month period recommendations to tender peer group* over a 12-month to a takeover offer) period RISK QUALIFIERS Average Risk Above-average Risk Speculative Risk represented by the stock is in line Risk represented by the stock is greater than High degree of risk represented by the with its peer group* in terms of volatility, that of its peer group* in terms of volatility, stock, marked by an exceptionally low liquidity and earnings predictability liquidity and earnings predictability level of predictability * Peer group refers to all of the companies that an analyst has under coverage and does not necessarily correspond to what would typically be considered an industry group. Where an analyst’s coverage universe is such that ‘relative’ performance against a ‘peer group’ is not meaningful, the analyst will benchmark the rating against the most appropriate market index 32 SEPTEMBER 2, 2021 Distribution of ratings Rating Desjardins Desjardins coverage % Desjardins Investment % category rating universe (# of stocks) distribution Banking (# of stocks) distribution Buy Buy/Top Pick 125 73 93 70 Hold Hold 46 27 38 29 Sell Sell/Tender 1 1 1 1 Total 172 100 132 100 High Tide Inc. Rating History as of 09-01-2021 Powered by: BlueMatrix 16 14 12 10 8 6 4 2 0 Oct 18 Jan 19 Apr 19 Jul 19 Oct 19 Jan 20 Apr 20 Jul 20 Oct 20 Jan 21 Apr 21 Jul 21 Closing Price Price Target Alimentation Couche-Tard Inc. Rating History as of 09-01-2021 Powered by: BlueMatrix B:$37.00 B:$38.50 B:$40.00 H:$43.50 B:$44.00 B:$47.00 T:B:$49.00 B:$44.00 B:$47.00 B:$51.00 B:$45.00 B:$48.00 B:$50.00 7-Sep-18 29-Nov-18 21-Mar-19 11-Jul-19 23-Aug-19 6-Sep-19 28-Nov-19 20-Mar-20 20-Apr-20 3-Sep-20 19-Jan-21 28-Jun-21 30-Jun-21 60 55 50 45 40 35 30 25 Oct 18 Jan 19 Apr 19 Jul 19 Oct 19 Jan 20 Apr 20 Jul 20 Oct 20 Jan 21 Apr 21 Jul 21 B:$56.00 19-Jul-21 Closing Price Price Target ATD.B history: Transfer of coverage 28-Nov-19 Empire Company Limited Rating History as of 09-01-2021 Powered by: BlueMatrix B:$32.00 H:$30.50 H:$31.00 H:$36.00 H:$37.00 T:B:$39.00 B:$37.00 B:$30.00 B:$34.00 B:$36.00 B:$38.00 B:$39.00 B:$42.00 14-Dec-18 11-Mar-19 28-Jun-19 13-Sep-19 17-Oct-19 28-Nov-19 13-Dec-19 13-Mar-20 16-Apr-20 19-Jun-20 23-Jul-20 11-Sep-20 23-Oct-20 50 45 40 35 30 25 20 Oct 18 Jan 19 Apr 19 Jul 19 Oct 19 Jan 20 Apr 20 Jul 20 Oct 20 Jan 21 Apr 21 Jul 21 B:$44.00 B:$45.00 10-Mar-21 24-Jun-21 Closing Price Price Target EMP.A history: Transfer of coverage 28-Nov-19 33 SEPTEMBER 2, 2021 Loblaw Companies Limited Rating History as of 09-01-2021 Powered by: BlueMatrix B:$62.00 B:$66.00 H:$70.00 B:$70.00 B:$73.00 B:$78.00 T:H:$76.00 H:$73.00 H:$76.00 H:$75.00 H:$70.00 H:$69.00 H:$75.00 8-Nov-18 15-Nov-18 22-Feb-19 2-May-19 25-Jul-19 17-Oct-19 28-Nov-19 21-Feb-20 16-Apr-20 30-Apr-20 18-Dec-20 26-Feb-21 16-Apr-21 100 90 80 70 60 50 40 Oct 18 Jan 19 Apr 19 Jul 19 Oct 19 Jan 20 Apr 20 Jul 20 Oct 20 Jan 21 Apr 21 Jul 21 H:$77.00 H:$85.00 H:$88.00 6-May-21 26-Jul-21 29-Jul-21 Closing Price Price Target L history: Transfer of coverage 28-Nov-19 Metro Inc. Rating History as of 09-01-2021 Powered by: BlueMatrix H:$51.00 H:$54.00 H:$57.00 T:H:$59.00 H:$57.00 H:$60.00 H:$61.00 H:$59.00 H:$66.00 30-Jan-19 15-Aug-19 17-Oct-19 28-Nov-19 29-Jan-20 16-Apr-20 23-Apr-20 27-Jan-21 11-Aug-21 70 65 60 55 50 45 40 35 Oct 18 Jan 19 Apr 19 Jul 19 Oct 19 Jan 20 Apr 20 Jul 20 Oct 20 Jan 21 Apr 21 Jul 21 Closing Price Price Target MRU history: Transfer of coverage 28-Nov-19 Chart legend: TP: Top Pick, B: Buy, H: Hold, S: Sell, NR: Not Rated, I: Company initiation, T: Transfer of coverage, S: Coverage suspended, DC: Coverage dropped Full disclosures for research of all companies covered by Desjardins Capital Markets can be viewed at https:// desjardins.bluematrix.com/sellside/Disclosures.action. LEGAL DISCLAIMERS Desjardins Capital MarketsTM is a trademark used by Desjardins Securities Inc., Desjardins Securities International Inc. and Fédération des caisses Desjardins du Québec, wholly owned subsidiaries of Mouvement des caisses Desjardins. Dissemination of Research Desjardins Capital Markets makes all reasonable effort to provide research simultaneously to all eligible clients. Research is available to our institutional clients via Bloomberg, FactSet, FirstCall Research Direct, Reuters and Thomson ONE. In addition, sales personnel distribute research to institutional clients via email, fax and regular mail. Additional Disclosures Desjardins Capital Markets equity research analysts are compensated from revenues generated by various Desjardins Capital Markets businesses, including Desjardins Capital Markets’ Investment Banking Department. Desjardins Capital Markets will, at any given time, have a long or short position or trade as principal in the securities discussed herein, related securities or options, futures, or other derivative instruments based thereon. The reader should not rely solely on this publication in evaluating whether or not to buy or sell the securities of the subject company. Desjardins Capital Markets expects to receive or will seek compensation for investment banking services within the next three months from all issuers covered by Desjardins Capital Markets Research. Legal Matters This publication is issued and approved for distribution in Canada by Desjardins Securities Inc., a member of the Investment Industry Regulatory Organization of Canada (IIROC) and a member of the Canadian Investor Protection Fund (CIPF). In the US, 34 SEPTEMBER 2, 2021 this publication is issued via the exemptive relief described in SEC Rule 15a-6, and through reliance on Desjardins Securities International Inc., a member of FINRA and SIPC. This publication is provided for informational purposes only, and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such offer or solicitation would be prohibited. 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